Nearly everyone has experienced the inability to buy needed supplies, from consumers to multi-national corporations. Just-in-time, single-source supply chains have unraveled and now thinking is changing to just-in-case, multiple supply chains. Is this pandemic effect on the supply chain transitory or permanent? If you factor in cold snaps in Texas, hurricanes, floods, and other natural disasters that are increasing in frequency, supply chain disruption will be the new normal.
Long, international supply chains were built to minimize costs. Now, as we experience delays worldwide, we’ve found out how inflexible they are. We have traded lower cost for lack of control. The Institute for Supply Management (ISM) recently reported a manufacturing index of 61.3, which indicates manufacturing growth. However, there is another ISM measurement to be reckoned with: the supplier-deliveries index, which, at 75.6, is at a recent high. This index indicates how quickly suppliers are fulfilling orders. This higher index shows that deliveries are taking longer to arrive, causing the manufacturing index to show a false positive. Shipping issues are largely responsible for driving theses high index levels.
An additional problem for nearly all growing businesses is the lack of people looking for jobs. Currently, there are 3 million fewer workers in the market than pre-pandemic levels. There are many reasons this is occurring, but regardless, nobody is predicting a fast fix. Labor shortages are projected through 2022 and will continue to compound supply chain issues.
What are managers doing about this untenable situation? The following list describes a few of the steps being taken, some of which may be useful for you. Hopefully, some of your suppliers are taking some of these actions, as well, which will help you down the line.
- Companies are setting up secondary suppliers closer to home in Latin America and Eastern Europe. They have not totally abandoned their existing supply chain, but they are diversifying sourcing geographically.
- Your supply needs forecasting now should include buffer inventory, as well as immediate consumption needs. You may decide to rotate your buffer inventory through your production cycle and order buffer stock from another supplier.
- Companies are bringing some of their supply sourcing in-house and taking out the middleman.
- Companies are locating facilities close to US suppliers to reduce shipping time and costs.
- Large companies are using their purchasing clout to buy raw materials for their suppliers.
- European companies are near-sourcing to Serbia, Croatia, Turkey, and Egypt, where costs are nearly comparable to Asia.
- Companies are investing in automation to lessen the labor shortage on a permanent basis.
- All companies are sharpening their forecasting processes.
Smaller companies are looking for outsourcing partners closer to home. The startup rate for new businesses has increased substantially as people leave their jobs to start their own businesses. A Google search for products and materials will show the websites of new companies offering what you need. Smaller companies are also shifting their supply needs to those products with the highest margins and allowing low-margin items to go unstocked.
In summary, there is no one solution to these complex issues. Planning is now the most important part of your production cycle. Alternate plans with alternate suppliers are now the long-term goals, and absolute low cost is no longer the driver. Your competitors are suffering the same shortages, and everyone will raise prices. It is hard to gain market share if you can’t deliver to your customers, so emphasize stabilizing what you can deliver for customer goodwill. With the current business environment, focus on being the tortoise and forget the hare.
C Squared Solutions provides interim or fractional CFOs, COOs, and CEO advisors in nearly all industries. We analyze and advise on this issue frequently through sophisticated modeling and experienced management. Give us a call and we can offer more information and details. We have been there and done that!
